Question

Problem 4-5 (Essay) Presented below is a combined single-step income and retained earnings statement for Nerwin Company for 2017. (000 omitted) Net sales $640,000 Costs and expenses Cost of goods sold $500,000 Selling, general, and administrative expenses 66,000 Other, net 17,000 583,000 Income before income tax 57,000 Income tax 19,400 Net income 37,600 Retained earnings at beginning of period, as previously reported 141,000 Adjustment required for correction of error (7,000 ) Retained earnings at beginning of period, as restated 134,000 Dividends on common stock (12,200 ) Retained earnings at end of period $159,400 Additional facts are as follows. 1. “Selling, general, and administrative expenses” for 2017 included a charge of $8,500,000 that was usual but infrequently occurring. 2. “Other, net” for 2017 included a loss on sale of equipment of $6,000,000. 3. “Adjustment required for correction of an error” was a result of a change in estimate (useful life of certain assets reduced to 8 years and a catch-up adjustment made). 4. Nerwin Company disclosed earnings per common share for net income in the notes to the financial statements. Determine from these additional facts whether the presentation of the facts in the Nerwin Company income and retained earnings statement is appropriate. If the presentation is not appropriate, describe the appropriate presentation and discuss its theoretical rationale.

Answer 1

The presentation of income statement & retained earning account is not appropriate

According to accounting standard the income statement include all the expense & revenue for the period it prepared. In addition to normal items of revenue & expenditure, it should include the extraordinary items for the period as a comprehensive income & expenditure.
Thus the income statement is either made as comprehensive income statement or made in two parts:
An income statement displaying items of profit & loss, and
A statement of comprehensive income that begins with profit & loss & display component of comprehensive income & expenditure.
In the Nerwin Company presentation all items are shown together which a wrong presentation is. The normal items should be segregate from the irregular items.

Threfore the first three :

a)Selling, general, and administrative expenses-should be reported in income before extraordinary items as this is material

b) loss on sale of equipment-this is an extraordinary item and should be reported separately because nelson is not in the business of purchase and sale of euipment

c)Adjustment required for correction of an error-again this is an extraordinary item and hence reported separately

According to IAS 1 requires an entity to present a statement of changes in equity as a separate component of the financial statements. The statement must show: [IAS 1.106]
•total comprehensive income for the period, showing separately amounts attributable to owners of the parent and to non-controlling interests
•the effects of retrospective application, when applicable, for each component
•reconciliations between the carrying amounts at the beginning and the end of the period for each component of equity, separately disclosing:

• profit or loss
• each item of other comprehensive income
• transactions with owners, showing separately contributions by and distributions to owners and changes in ownership interests in subsidiaries that do not result in a loss of control

The following amounts may also be presented on the face of the statement of changes in equity, or they may be presented in the notes: [IAS 1.107]
•amount of dividends recognized as distributions, and
•the related amount per share

According to IAS 1 the company should disclose the dividend per share in the notes to financial statement. EPS should not be disclosed in the notes to the financial statement.

Hence EPS should be disclosed on the face of income statement not in the notes